How Short-Seller Carson Block Became The Most Hated Man In China

Screenshot via Bloomberg TV
Carson Block, the young hotshot short-seller who runs Muddy Waters Research, has become famous (or infamous) for shorting Chinese companies. He was a virtual unknown in Wall Street circles until his 2010 report on Orient Paper crippled the stock's value.

Due to Carson's uncanny accuracy in developing targets to short, experts in the industry think he's much better than the SEC at catching fraudsters in the act. James Rickards, senior managing director of Tangent Capital Partners, has declared, "Block is in the intelligence business where you gather tidbits of information, you fuse them together, connect the dots and then you draw a conclusion. The SEC is much more like cops. First the crime is committed, and then they go to solve the crime. But Block is looking at the crime in progress."

An ex-colleague describes Block as "an arrogant guy with an independent and somewhat restless streak," and Carson admits to having "discipline problems" from an early age.

But a brash personality and questionable tactics haven't held Carson back. He's continued his take downs in China, attributing it to his ability to see "through appearances to a Chinese company's true worth."

Carson's road to the top has had plenty of speed bumps. His early business ventures ended in failure, and he's shuffled around at least four different jobs before opening Muddy Waters.

He's done it all in a short 36 years, so there are plenty of chapters to be written in the Carson Block story. We'll be watching.

In high school, Carson was more interested in partying than studying

Block graduated with a 1.4 GPA in his senior year, and says of his time at school, "I ranked either first or second in my senior year in terms of parties that I hosted. The police became a regular presence outside my father's place."

He got his undergraduate degree at the University of Southern California

Carson majored in business administration and graduated in 1998. After school, he shuffled through jobs, working for W.A.B. Capital as a principal and opening an investment business in Shanghai before returning to the U.S. to enhance his education.

Carson got his J.D. from the Chicago-Kent College of Law, and went on to work for the firm Jones Day

Block left Jones Day to co-write 'Doing Business in China for Dummies'

Barnes & Noble

This is another example of a young Carson jumping from career to career, trying to find his niche. In the 2007 book, Block told readers that in China "you may face some of the most brutal negotiations you've ever seen."

He also started his own storage company in Shanghai called Love Box Storage.

Love Box Self Storage

The company was one of the first storage businesses in China, though it was not very successful. According to the Globe and Mail, Love Box Storage has "been pulled back from the brink of financial failure on no less than four occasions."

In 2010, Block took a trip to China that would forever change his life.

In January, he went to Baoding City to do some research on Orient Paper for father's firm. Block was astounded at the shoddy quality of the plant, saying "The machinery was basically scrap metal that probably belonged to a state-owned enterprise."

Block's misgivings about Orient Paper led him to found Muddy Waters Research.

After Orient passed its next accounting audit, Carson was cajoled into action. On June 28, 2010, he published a scathing report on Orient Paper, claiming the firm overstated revenue by 40 times the previous year and rating the company "a strong sell." The firm's shares fell by 47 percent over the next month.

He didn't stop with Orient Paper, and took down Rino International a few months later

YouTube via TradeTheTrend

Muddy Waters released a report in November 2010 indicating that the wastewater equipment designer had exaggerated sales -- which the company confirmed eight days later. The stock tumbled 67 percent that month and was delisted from the NASDAQ.

2011 was a great year for Carson. He was honored as one of Bloomberg Markets 50 Most Influential People.

Reuters via YouTube

The excerpt from the magazine credits Block's revelation of Sino Forest's accounting fraud as the basis for his inclusion. As hedge fund manager Sahm Adrangi asserts, "The Carson Block model of very detailed reports has set a new standard."

Block has moved his attention from China because he says today's Chinese shorts are harder to find. He is also concerned for his safety.

Screenshot via Reuters TV

After his dismantling of Sino-Forest, Block reported that he and his staff were harassed by agents of the Chinese government as well as 'tattooed gangsters.' He believes the Chinese government is enabling or otherwise overlooking accounting fraud by domestic firms.

Olam isn't rolling over, and has since sued Block.

YouTube via NewsOnABC

The firm, which is responsible for 90 percent of the world's peanut trade, filed a lawsuit against Block two days later, calling his statements slanderous and baseless. Olam has the backing of Temasek Holdings, Singapore's sovereign wealth fund, which happens to be its largest shareholder. Temasek has recently underwritten another bond issuance for Olam.

Rumors of Muddy Waters report against a company can send its stock tumbling. That's what happened to Chinese meat processor Yurun.

Shares in Yurun, a Chinese meat processor, fell by one-third after rumors spread that Muddy Waters was about to issue a report on the company. Block issued a statement afterwards, saying "I had never even heard of China Yurun. Somebody obviously used our name. And that's something that is very bothersome to me."